Building a Healthcare System from Scratch, Part 3: Getting the Incentives Right

carrotIn Part 1, I enumerated the jobs we want a healthcare system to do for us. In Part 2, I explained which parties in the healthcare system (providers or insurers) have incentives to perform each job. Now comes the interesting challenge of figuring out how we can get those parties to perform those jobs well.

To understand this discussion, two key definitions must be absolutely clear.

First, the definition of value.

Value = Quality / Price

High value can be found at any price point. For example, it could be reasonable quality for a super low price, or it could be the absolute best quality for a not-crazy-high price. It just depends on how much money is available to be spent.

And just as a brief sidenote, I’ll mention that “quality” has many facets, and it’s the patient who–as the person consuming the service–ultimately gets to decide what constitutes quality. And “price” denotes the actual total amount of money paid for the service.

Second, the definition of a financial incentive. A financial incentive is something that rewards behavior with increased profit. Profit is the key here. Companies (or, the people who run them) don’t take huge risks and expend great effort that won’t result in more money for them. (This also applies to non-profit organizations, only they call it “surplus.”)

With those two definitions in mind, here is the principle: Our goal is to create financial incentives that reward value for patients. In other words, a provider or insurer needs to make more profit when they provide higher value for patients. This would motivate them to out-compete and out-innovate their competitors. And the form of that competition wouldn’t be destructive corner-cutting and responsibility-avoiding–it would be to actually provide higher value for patients.

Instead of hospitals spending fortunes on beautiful lobbies, they would be competing on how to make care cheaper, faster, and more convenient. Because that’s how they would make more profit.

Instead of insurers climbing over each other to find ways to cream skim the healthiest patients and creatively design networks to get sick patients to avoid them, they would be competing on how to most efficiently provide cost-saving prevention and how to have the best customer experience. Because that’s how they would make more profit.

Some say financial incentives have no place in healthcare. What they don’t understand is that there will always be financial incentives in any industry where people get paid for their work. We can’t ignore the inescapable presence of financial incentives in healthcare. But we can shape them in a way that motivates providers and insurers to maximize the value delivered to patients.

valuewithprofit

In Part 4, I’ll enumerate the four levers that affect profit, which will then lead to an explanation of the barriers healthcare systems commonly have to those levers being used to reward value with profit.

If We Lower Total Healthcare Spending, Who Will the Money Come from?

Image credit: academyhealth.org
Image credit: academyhealth.org

At the recent AcademyHealth Annual Research Meeting in Baltimore, I went to a session on the accomplishments and challenges of community collaboratives. A community collaborative is a pretty cool idea that goes something like this: for a specific community (i.e., city), let’s get all the leaders of the providers and payers in a room (plus a bunch of other stakeholders committed to improving health) and make some decisions collaboratively on how we can fix healthcare in the community. The Robert Wood Johnson Foundation has provided the money to make these things happen in 20 different communities in the U.S. (see Aligning Forces for Quality, and Value-Based Payment Reform).

Sounds like a great idea, right? Well, an interesting challenge has arisen. More and more, these collaboratives are expected to find ways to reduce the total healthcare spending in that community. But so far, they’ve pretty much failed miserably. Why? Well, think about it. Here are all the leaders of payers and providers in that community sitting in a room together saying, “We need to reduce total spending,” but the savings are going to have to come from someone in that room, and none of them are going to say, “Sure, my organization will take one for the team! I’ll have to cut everyone’s pay, but because it’s for a good cause, they’ll love it.”

Does this mean these kinds of collaboratives are utterly useless in terms of lowering total spending in communities? That was the question I (carefully) asked at the end of the session, and one of the panelists gave a really insightful answer. To paraphrase/translate/elaborate on what he said, his answer went something like this:

Yeah, we’re not going to convince anyone in that room to just give up money like that. But what we can do is come up with standardized ways of reporting prices and quality. And when those are standardized across all payers and providers, patients will be better equipped to choose higher-value payers/providers, which, in the U.S., usually means ‘cheaper’ payers/providers. So this standardization will allow total spending to go down by getting more people receiving services from cheaper competitors. Thus, the higher-priced competitors will be the ones who are losing money when total spending goes down, all because we helped standardize quality and price reporting.

I agree. There are still many barriers to getting patients to choose these “higher-value” providers/payers, but this would help solve one of the biggest ones. And with each barrier we overcome, more patients will be enabled to receive higher-value care, which is what everyone wants, right?

Can We Please Use the Proper Definition of Value?

I went to the AcademyHealth Annual Research Meeting over the weekend (it’s probably the biggest health policy conference of the year), and then this morning I went to the annual report for one of the regions participating in RWJF’s Aligning Forces for Quality, and I can’t stand the abuse of the word “value” any longer. The picture on the right is part of the cover of the program I came home with from the meeting this morning. Does the text strike anyone else as . . . ineffective? Shortening the path is great, but shortening it to “high-quality, high-value health care”?

Let’s do a refresher on what the word “value” means. This has a precise definition in the professional and academic world, and I guess anyone can choose to define a word however they want, but this is the widely accepted (and most useful) definition:

Value = Quality / Price

Quality can be defined differently as well, but it generally includes outcomes, patient experience, and everything a patient wants. It doesn’t just include quantitative metrics, but it also includes all the softer metrics that are important to patients. For example, the softer metrics related to a physician would include bedside manner, friendly office staff, convenience, length of relationship, and so forth.

Price is the amount of money paid to get the quality. PRICE IS NOT THE SAME AS COST, NOR IS IT THE SAME AS TOTAL SPENDING. I’ve never done all caps for a sentence before, but this is the first time I felt like a sentence needed it. Cost would be the actual costs that were incurred to provide the service, but patients don’t care about cost. They care about the price, the thing they actually have to pay. And, in healthcare, beware of the word “charge” as well, which generally refers to the price a provider is asking for even if the insurer pays him something completely different. Confused? I explain provider pricing in an earlier post.

Now that the more appropriate meaning of the word “value” is understood, look back at the text on the cover picture. “Shortening the Path to High-quality, Low-cost Health Care” would work. “Shortening the Path to High-value Health Care” would also work, but I guess it would not be as explicit as it would be to anyone who hasn’t read this blog post. But not Hooper Humperdink. Not him.

So, next time you hear someone say, “We need to improve the value of healthcare delivered in the U.S.,” you should think, “Ah. This person wants to improve the quality and/or decrease the prices of healthcare in the U.S.” And FYI, the only way we can substantially decrease prices is to decrease COSTS first. Yes, I would say that our new absolutely most important goal in the health policy world (now that the ACA stands; for the time being at least) is to help providers decrease costs and then make sure prices follow.

Why Insurers Are Finally Investing in Primary Care

Image source: eurekafirerescue.org

First off, I apologize for the long delay between blog posts. I’m still here, and I still am obsessed with health policy. I’ve been working on a publication that outlines some of what I’ve figured out lately, and I’d rather people first see it in a publication by me rather than by someone else who came across it on my random blog and ran with it.

Anyway, let’s talk about why insurers are starting to do things differently lately. They’ve started doing pilot projects to see if investing in primary care will save them money by preventing unnecessary tests and services (they predict it will in a big way). They’ve also started investing more in IT to keep track of patients’ health information, again hoping they can use it to find ways to prevent patients from needing preventable tests and services.

Of course this makes sense. If they, as a business, can invest $500,000 in primary care and then save $600,000 by preventing a whole bunch of things down the road that they otherwise would have had to pay for, it’s a great investment! But why haven’t they started trying out these investments in cost-saving prevention until now? Remember that a business is always trying to use the money they’re making and invest it in projects that improve their financial performance. But there are a lot more options of projects to invest in than they have the money to invest. So they are trying to find the projects that seem to offer the greatest reward for the lowest risk. This would lead us to assume that these kinds of projects haven’t had a great reward-risk ratio until now.

I haven’t figured out a great way to organize my thoughts about this, so here they are in a random order. (FYI, one of the items in the list below is going to change, and it explains why insurers are changing their ways, so you better figure out which.)

  • If an insurer wants to invest in prevention, but then the patient switches insurance before the insurer gets to reap the savings, that was basically wasted money. Yeah the patient is healthier as a result, so that’s a small consolation prize, but the analyst who forgot to compare the expected payback period with the average length a patients stay on their insurance will probably still be fired.
  • Trying to pay a primary care physician to do better at keeping patients healthy isn’t an across-the-board money saver. Actually, it probably only saves money for a small portion of patients. But the thing that makes it worth it is that those patients are probably the highest-cost patients, so a ton of money still stands to be saved.
  • Paying a physician more to establish a medical home or hire a care manager or something like that probably involves the insurer paying the whole cost for the physician to do that, otherwise they won’t. And since the physician has the care manager, chances are he/she will use that care manager for all his/her patients who need the service, including patients that are covered by other insurers. So the insurer is now stuck paying for a competitor’s patients to get healthier, saving the competitor money even though the competitor didn’t invest a thing.
  • An insurer won’t be very popular if they add services to only a select group of patients on the exact same coverage plan. Other people will say that’s unfair and demand to receive the same service. This would be annoying, and they’d have to find a way around it so they don’t end up spending all this prevention money on people who won’t end up saving them much in return.
  • People, when buying insurance plans, aren’t really able to compare the coverage offered by different plans. There are so many complexities, all they can really do is look at the price and look at some of the basic coverage provisions, but that’s it. There may be all sorts of limitations that they don’t even know about. Because of this, insurers can get away with offering a high-priced plan with not great coverage and still (through great marketing) convince a lot of people to buy it, so where is the reward in finding ways to lower price by doing cost-saving prevention when you can just add a few exclusions to save money instead and nobody will ever notice when they’re choosing their insurance plan?

I hope you figured out that the last one is changing. With new tools coming out that help people more easily compare the quality of coverage offered by different health plans, including insurance exchanges’ standardized levels of coverage, people will be able to spot the insurance plan with equivalent coverage but a way lower price. And when that happens, people will flock to that insurance plan. This is a significantly larger incentive to try out risky investments in cost-saving prevention, which also means it’s quite a risk not to try anything out for fear that you’ll lose all your customers. Finally, cost-saving prevention projects that actually decrease overall health spending and keep patients healthier will top every analyst’s list!

And in case you’re wondering what role increasing health costs have played in this whole thing, the answer is . . . probably nothing. Health costs have always risen, and insurers have always raised premiums to maintain pretty constant profit margins. Sometimes spending increases slower and they make a bundle, sometimes costs rise faster than predicted and they increase premiums even more the next year. But none of this changes the risk-reward evaluation done by analysts to decide if they should finally start to invest in cost-saving measures, although it might in an indirect way because people are clamoring louder (as costs rise) to get cheaper health insurance, but unless those people were finally able to compare the value of different plans, all their clamoring wouldn’t have much of an effect on insurers’ investment strategies.